Performance Evaluation of Pension Funds Management Companies with Data Envelopment Analysis

Article excerpt


This article uses Data Envelopment Analysis (DEA) to evaluate the performance of Portuguese pension funds management companies from 1994 to 2003, combining operational and financial variables. We evaluate how close the pension funds management companies are to the best practices frontier, also analyzing how they manage their funds. Implications of this research for managerial purposes are then drawn.


Pension hinds are funds that are managed either by an enterprise designated as a pension funds management company or by an insurance company with the aim of attracting one or more pension plans (Garcia, 2004). Active investment management helps to keep markets efficient and to ensure the flow of funds to the most successful enterprises, playing a major role in the allocation of resources within the economy. Additionally, pension funds provide people with retirement income and security. These management companies are of paramount importance to the contemporary economy, given the increase in the size of the aged and retired population and the consequent problems in guaranteeing the financial sustainability of social security (Valdés Prieto, 1997).

In this article, we analyze the technical efficiency of Portuguese pension funds management companies from 1994 to 2003 with the aid of four well-known DEA models: (i) the DEA-CCR model (Charnes, Cooper, and Rhodes [CCR], 1978); (ii) the DEA-BCC model (Banker, Charnes, and Cooper [BCC], 1984); (iii) the Cross-Efficiency DEA model (Sexton, Silkman, and Hogan, 1986; Doyle and Green, 1994); and (iv) the Super-Efficiency DEA model (Andersen and Petersen, 1993). Previous research into pension funds management companies was carried out by Barrientos and Boussofiane (2005), with the use of DEA-CCR and DEA-BCC models, with Chilean data.

DEA is a linear programming technique that enables management to benchmark the best-practices decision-making units (DMUs), (in this case, pension funds management companies), by calculating scores denoting their efficiency (Brocket et al., 2004). Furthermore, DEA provides estimates of the potential improvement that can be made by inefficient DMUs. Throughout this article, we shall assume some knowledge of DEA on the reader's part. Readers who are not familiar with DEA are referred to Fare, Grosskopf, and Lovell (1994); Charnes et al. (1995); Coelli, Rao, and Battese (1998); Cooper, Seiford, and Tone (2000); Thanassoulis (2001); and Zhu (2002).

This article expands upon previous research into the pension industry by analyzing the efficiency of its management companies with a DEA model. In the first stage, the Data Envelopment Analysis (DEA) model is used to calculate both technical and scale efficiency. In the second stage, the Mann-Whitney U-test is used to test some hypotheses. To the authors' knowledge, this is one of the first articles to examine the relative efficiency of pension funds management companies. From an academic perspective, the particular contribution of this article lies in the use of alternative DEA models, whereas previously published articles have mainly restricted the analysis to one model.

The motivation for the present research is derived from the following circumstances faced by the Portuguese pension funds management companies. First, mergers and acquisitions are present in the market during the period of analysis, which signifies a constant effort by the pension funds management companies to increase their size.1 second, performance evaluation should not be restricted solely to an assessment of investment performance. The management institution, whether a pension funds management company or an insurance company, enjoys a special relationship of trust and responsibility with the principal (either a person or an organization) and must resolve conflicts of interest in favor of the principal or beneficiary (Lakonishok, Shleifer, and Vishny, 1992).

The Portuguese pension funds management industry reacts to these circumstances by attempting to increase the efficiency of input usage. …